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Article

An Application of Transaction Cost in the Portfolio Optimization Process

Grace Chung and Robert Kissell
The Journal of Trading Spring 2016, 11 (2) 11-20; DOI: https://doi.org/10.3905/jot.2016.11.2.011
Grace Chung
is a quantitative analyst with Kissell Research Group in Great Neck, NY. grace.chung@kissellresearch.com
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Robert Kissell
is chief executive officer of Kissell Research Group in Great Neck, NY. robert.kissell@kissellresearch.com
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Abstract

We propose a transaction cost analysis (TCA) portfolio optimization procedure that incorporates transaction costs directly into the problem of the objective function of portfolio optimization. The results show that a fund achieves considerably higher net returns with TCA optimization than with traditional quadratic programming methods that do not directly consider transactions costs. For a large-cap, 50-stock portfolio, the improvement in net returns was on average +4.5 bp to +8.2 bp and as high as +7.6 bp to +13.5 bp. For a large-cap, 100-stock portfolio, the improvement in net returns was on average +3.2bp to +7.0 bp and as high as +5.0 bp to +10.2 bp. These results show that a manager can start with a seemingly suboptimal or inefficient ex ante portfolio in traditional mean variance space and earn higher ex post net returns after accounting for transaction costs.

  • © 2016 Institutional Investor, Inc.
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The Journal of Trading: 11 (2)
The Journal of Trading
Vol. 11, Issue 2
Spring 2016
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An Application of Transaction Cost in the Portfolio Optimization Process
Grace Chung, Robert Kissell
The Journal of Trading Mar 2016, 11 (2) 11-20; DOI: 10.3905/jot.2016.11.2.011

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An Application of Transaction Cost in the Portfolio Optimization Process
Grace Chung, Robert Kissell
The Journal of Trading Mar 2016, 11 (2) 11-20; DOI: 10.3905/jot.2016.11.2.011
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